Three Emerging Managers Worth Watching

April 16, 2013

Picking a CTA from amongst the thousands of available managed futures programs can be a daunting task, and it’s why we created the Attain Capital Managed Futures Rankings. Our proprietary algorithm gives a single snapshot of hundreds of CTAs by ranking them on a scale of 1-5 flags. While it’s no substitute for due diligence and a careful evaluation of an investor’s goals and expectations, we believe it is an excellent starting point. Of course, no methodology comes without its quirks, and close watchers of our rankings list may have noticed that, on occasion, programs will suddenly “pop” onto the rankings. One day they aren’t on the list, and the next day they appear – sometimes with a 4 or 5-flag ranking.

It’s no mistake, and it isn’t that these CTAs are suddenly transforming into the best of the best at the stroke of midnight. It’s actually a consequence of the way that we filter the programs that are out there. You see, before we ever get into the nitty-gritty of comparing stats such as downside deviation and 3 year compound returns, we narrow the field with one simple rule – a CTA must have at least a 36 month track record before it is eligible for inclusion.

So when an up-and-coming manager hits their 3rd birthday, so to speak, we include them in our rankings universe and calculate a ranking for them. But just finding out about a program the day it hits its third anniversary wouldn't do our clients any good, so we take a closer look at their record and trading style prior to hitting the rankings.

What we find when looking into these emerging managers is a classic risk/reward dilemma. On the one hand, their early success could be a fluke - they may not yet have proven themselves by performing well under a diverse array of market conditions. But on the other hand, these young programs could represent an opportunity to invest with the next great CTA before they make it big. Only time will tell how successful the programs which have recently jumped onto our rankings will be, but we wanted to share some quick profiles of three of the higher ranked ones: Stenger, Protec, and Global Sigma.

Newly Ranked Programs at Attain

As a reminder, our algorithm uses multiple risk and reward criteria across multiple time frames to produce what we believe to be the most comprehensive risk-adjusted CTA rankings in the industry. Of course, the most important component to any rankings system is clean data. We believe firmly in the old saying “garbage in, garbage out.” In other words, the quality of the final product can only as good as the ingredients – or in this case, the data – used to make it.

With this in mind, we apply a number of filters other than length of track record to pare down the BarclayHedge database of 2000+ CTAs. We remove programs that are not registered as CTAs, those that are exclusively fund products, hedge funds mistakenly categorized as CTAs, and programs that include only proprietary data rather than actual performance. Once we have vetted the programs to meet technical standards, we prune the list further with discretionary filters, weeding out programs with well-known structural or managerial weaknesses that would cause us to recommend against allocating with them. And finally, they must have 36 months of performance data.

Why 36 months? At 36 months, we have a large enough sample size to make statistical inferences about a trading program. This size sample is also large enough to justify that the CTA being evaluated is a viable business concern. Granted, a 3 year track record pales in comparison to managers with 5, 10, 15, and 20 year track records and we are cognizant of this fact. We understand that the managers we are talking about today were nowhere to be found in the financial crisis of 2008, September 11th, or the dot com bubble of the early 2000s. To combat the potential bias we use time-weighted statistics, evaluating each metric across 1, 3, 5, and 10 year time periods in addition to the full length of the program's performance. This focus on performance and risk control across time frames ensures that great returns far back in a program’s track record don’t skew their ranking, and, likewise, that newer programs who haven’t "lived through the tough times" don’t dominate the rankings (as they earn scores of 0 for any period they weren’t active – i.e the 10 year period for a program with just 3 years of track record).

So how much can you tell about a program at 36 months, and how indicative are those first three years of the future of the manager? Our curiosity got the best of us, so we went back and looked at a small sample of the largest and most well known CTAs to see where they were in terms of AUM after three years of trading.

Manager

Program

Start Date

AUM at 36 Months (millions)

MAN AHL

Alpha

Oct-95

$2,067.97

Aspect

Diversified

Dec-98

$459.65

Winton

Diversified

Oct-97

$121.50

Millburn Ridgefield

Diversified

Feb-77

$67.91

Chesapeake Capital

Diversified

Feb-88

$48.90

QIM

Global

Dec-01

$12.25

John W. Henry

Financials

Oct-84

$8.90

It’s quite a range in outcomes, and it goes to show that some of the most successful programs of all time took a while to get going. But then, everyone had to start somewhere - QIM had only $12.25 million under management at the 36-month mark, but today, they manage over $3 billion. Today, their minimum investment ($20 million) is larger than the entire program after 3 years. Figuring out which of today’s $12 million dollar programs are likely to be managing billions in a decade… well, that’s where things get interesting.

Emerging Managers

Earlier this year, several programs crossed the 36 month mark and have entered the rankings as either four or five flag (our highest ranking) programs. These programs include a discretionary trader who cut his teeth on the floor of the CME, an options trader that is a veteran of SAC Capital, and energy traders from Florida who after years of hedging fuel exposure for clients, decided to take his skills over to the money management side of the business.

Disclaimer: past performance is not necessarily indicative of future results.

Who: Stenger Capital Management was launched in April 2010 by the father & son team of Chris and Scott Stenger, who cut their teeth as brokers and traders on the trading floors of Chicago. After a very successful career trading his own account, Scott moved his family to Colorado to pursue a less hectic lifestyle. After moving to Colorado, Scott was approached by friends and family who were interested in having the Stengers manage money for them. One thing led to another with the result being the official launch of Stenger Capital. Heading into this month Stenger Capital is managing $173 million for clients – a very impressive number for a program that had $0 under management just over 3 years ago.

What: The Stenger Capital Management program is a 100% discretionary global macro strategy based on Chris & Scott’s 65 years of combined trading experience. The majority of their trades - around 75% - take place in three sectors: stock index futures, fixed income, and grains. The pair will also take trades in gold, oil, and the Euro from time to time. All trading decisions are guided by technical analysis, although Chris also relies on a well-defined list of trading axioms that he has learned through his years of trading. Chris still does all of his charting by hand and carries the charts in a suitcase that the Stengers like to refer to as the “football.” Trade duration is typically two to five days with an average risk of 0.25% per trade.

Performance: As the track record demonstrates, Stenger Capital has posted very impressive risk-adjusted returns to this point with a compound ROR of 12.65% and a max drawdown of just -0.55% (Disclaimer: past performance is not necessarily indicative of future results). However, their performance record exhibits a high degree of what you might call “lumpiness.” This means that if you leave out the returns from just two months (+9.53% in October 2010 and +12.36% in July 2011) the remaining months are relatively unimpressive. Up to this point the Stengers have done an excellent job managing risk while waiting for those occasional big winners. We will continue to watch them with interest to see if they can generate enough returns to keep investors interested in the program.

Disclaimer: past performance is not necessarily indicative of future results.

Who: Dr. Hanming Rao brings an impressive set of educational credentials to the Global Sigma Plus program. He has a BS in Electrical Engineering from Tsinghua University in China, along with a Masters in Computer Science and Ph.D in Engineering Sciences from Harvard. After graduating from Harvard, Dr. Rao pursued a career in finance, first working with the Ellington Management Group and then with SAC Capital Advisors (Stephen A. Cohen) as a Global Macro Trader. There Dr. Rao honed his skills trading currencies and long/short equity strategies. Eventually, he struck out on his own, launching Global Sigma Group in late 2009 with a concentration on trading options and futures on the S&P 500.

What: The Global Sigma is a short-term volatility trader, meaning positions are held for a week or less. This trading strategy establishes positions via puts and calls on the S&P 500 along with e-mini S&P 500 futures for hedging during volatility spikes. The trading strategy first determines the likely direction of the market and then places bets on volatility around the direction of the markets. This is a very active trading strategy at 8000 round turns per million per year and margins as high as 80%. For comparison, a typical trend following strategy will be around 1500 round turns per million.

Performance: Up to this point the Global Sigma program has produced excellent risk adjusted returns, with a compound return of 19.24% and max drawdown of -1.55% (Disclaimer: past performance is not necessarily indicative of future results). The strategy does exhibit some similarities to the old saying about options sellers – picking up pennies in front of freight trains. But in this case, there are multiple tracks, with trains running in both directions simultaneously. We like that this program is systematic and there is a hedge overlay in the ES that is activated when needed. However, we still have reservations based on the amount of options that are traded so close to the market, as well as the margin usage running at very high levels. The program survived the flash crash of May, 2010 with a return of 3.04%. On the other hand, it experienced losses during the S&P downgrade of August 2011. Up to this point, Global Sigma has done an excellent job managing risk, with a very low drawdown. However, as with any trading strategy, we always expect future drawdowns to be larger. At this time Dr. Rao expects the worst case scenario for his program to be a drawdown of 10%.

Disclaimer: past performance is not necessarily indicative of future results.

Who: Protec Partners, LLC – ET1 program was launched in April 2010 by long time energy hedgers, Andrew Greenburg and Todd Garner. The principals have over 60 years of combined trading experience in energies including crude oil, heating oil, RBOB gasoline, and natural gas. Prior to starting Protec Fuel Management in 1999, Todd was Director of Refined Products and Vice President of Risk Management with The Williams Companies in Tulsa, OK. Mr. Greenburg’s is the former director of Trading for Exco-Intercapital and Berisford Capital Markets Group, where he directed trading of crude oil, refined fuels, and natural gas.

What: Protec Energy Partners ET1 program is discretionary, with trading decisions based on both fundamental and technical analysis. Positions are established via options, futures, and exchange-cleared swaps, although options are typically utilized most often. However, this program shouldn’t be confused with the short volatility option traders that are only selling premium. Protec plays both sides of the market, and is typically long volatility and looking to take advantage of a sustained trend in the energy complex. Option strategies used include vertical and calendar spreads, volume ratio butterflies, as well as strangles and straddles. The trading is longer term with an average hold time of 2 months on winning trades and 1 month on losing trades. On the risk management front, Protec targets volatility of 15% and a 20% margin-to-equity ratio.

Performance: In an age where many traders are deleveraging their strategies it is good know at least a few traders that still swing for the fences from time-to-time. Protec fits the bill with a compound rate of return of 43.41% and max drawdown of -14.43% over the past 36 months (Disclaimer: past performance is not necessarily indicative of future results). We expect Protec to continue to be an aggressive trader as they are targeting roughly 25% returns and have an approximate 10% monthly stop loss in place (hint they expect volatility). It should be noted that 10% is their monthly risk target and that they have experienced a 15% max drawdown in the past suggesting that future drawdowns will likely be larger than both figures.However, if you are looking for a unique program that is built for absolute returns and sports a low correlation to traditional CTAs, it is unlikely you will find another energy trader with a skill set comparable to what Protec has.

The Energy of Youth or the Wisdom of Experience?

The 36-month milestone is a big step for CTAs. As an investor, it is worth keeping in mind that even though these programs look very impressive, 36 months is still a relatively short period of time to evaluate a trading program. For example, none of these programs were trading during the financial crisis and for the most part they have always had the warm winds of quantitative easing at their back. There will be tougher times ahead for each of these programs. No trader has the Holy Grail and we should always expect the next largest drawdown to come in the future. However, up to this point, each of these programs has demonstrated the ability to thrive during a period when much of the industry has struggled.

IMPORTANT RISK DISCLOSURE

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IMPORTANT RISK DISCLOSURE Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect investor returns.

Past performance is not necessarily indicative of future results. The performance data for the various Commodity Trading Advisor ("CTA") and Managed Forex programs listed above are compiled from various sources, including Barclay Hedge, Attain Capital Management, LLC's ("Attain") own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

The dollar based performance data for the various trading systems listed above represent the actual profits and losses achieved on a single contract basis in client accounts, and are inclusive of a $50 per round turn commission ($30 per e-mini contracts). Except where noted, the gains/losses are for closed out trades. The actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: starting account balances, market behavior, the duration and extent of investor's participation (whether or not all signals are taken) in the specified system and money management techniques. Because of this, actual percentage gains/losses experienced by investors may be materially different than the percentage gains/losses as presented on this website.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.